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FSA modifications fail to solve PI dilemma

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  • 18/11/2002
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Professional indemnity (PI) insurance terms for intermediaries looks set to worsen despite the Fina...

Professional indemnity (PI) insurance terms for intermediaries looks set to worsen despite the Financial Services Authority’s (FSA) move to lower regulatory requirements for PI.

Keith Rutter, chief executive of insurer, The Underwriter, said insurers were wary of the market, with many feeling IFAs would be hit by mis-selling claims over endowment mortgages, as well as split capital and other investment vehicles.

Rutter said: ‘Unless part of a large firm, it is going to be difficult for IFAs to pay premiums or cover deductibles.’ He said the situation may be exacerbated by a property crash and added: ‘People act differently when their assets are under pressure. In the last property crash many surveyors were sued, and it is possible that homeowners may turn on their IFA if we see a similar decline in the property market.’ He said it was a case of IFAs acquiring increasing amounts of exposure and underwriters being unprepared to take on the risk.

Justin Modray, investment manager for IFA firm RJ Temple, accepted intermediaries were making more claims and commented: ‘With more claims it is natural premiums are going up, and it is not a hero and villain scenario, but a case of both sides looking to protect themselves.’ He said the changes in the PI levels made by the FSA were small steps and had not lessened the problem of increasing rates for intermediaries. Smaller companies will feel the rises most keenly and many may be forced towards networks. Modray said the increased regulation costs set to hit the market would only increase this pressure.

The FSA’s modifications to PI requirements are set to stay in place until the end of June next year. Tracy Mullins, director of public affairs for the Association of Independent Financial Advisers, acknowledged it was only a small step in the face of premiums which have risen by as much as 50% in many cases. She said the FSA’s continued agreement to accept IFAs self-certifying that they could meet their obligations was more likely to help the situation. A spokesman at the FSA denied this was turning a blind eye but rather easing the pressure on intermediaries and underwriters. He said firms would still need to show they could meet future liabilities.


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